Friday, November 15, 2019

The Morning Calls--The data isn't improving, but NotQE is


The Morning Call

11/15/19

The Market
         
    Technical
                      
The Averages (27781, 3096) again turned in a mixed performance (Dow down fractionally, S&P up fractionally).  Volume was up. Breadth was weaker but remains in overbought territory. The VIX was down 3/8 %---but continues to support the breadth overbought reading. 

My assumption remains that momentum is to the upside; but there are still some short term negatives:  (1) October 11th gap up opens need to be closed, (2) the VIX and breadth suggest equities are overbought and (3) the rate of change in the upward momentum of the indices is slowing noticeably.

The bond market continues to roar back, advancing another 1%.  It is now approaching its 100 DMA which recently reverted to resistance.  Clearly, a successful challenge to the upside would indicate an end to price weakness and the thesis that the economy is strengthening.

The dollar was down two cents but remains strong.  And that suggests either a strong economy or a flight to safety.

Gold advanced another 3/8 %; and like TLT is nearing its 100 DMA which recently reverted to resistance.  Also, like TLT, a successful challenge to the upside would suggest a change in momentum and question the thesis that the economy is strengthening.

            Thursday in the charts.

    Fundamental

       Headlines

Yesterday’s numbers were mixed.  October PPI was above expectations (which makes the Fed happy) while weekly jobless claims were disappointing.

            Overseas, the data turned negative again.  Preliminary Q3 Japanese GDP growth, Q3 EU employment, October Chinese fixed asset investments, industrial production and retail sales as well as October UK retail sales were below estimates.   The flash German Q3 GDP was better than expected; and the second estimate of Q3 EU GDP growth was in line.

            Japan’s economy slows.

            China’s economy slows.

            Not only that, but China’s massive credit expansion is just offsetting rising bad loans (this is really important).

            German economy narrowly escapes recession.

            In other news:

            China said that it is holding in depth talks with US.

***overnight, Kudlow says trade talks down to the short strokes.

            And the Fed announced its NotQE schedule for the rest of the year---and didn’t disappoint.  Money for nothing and the chicks are free.

                        BofA calls out the Fed on NotQE.

            I have long complained that one of the ill effects of QE was the inequality of the distribution of wealth.  Here are some stats that back me up.

            Liquidity trumps uncertainty.
 
            Bottom line: the economy is not improving.  The only real reason for even considering that it was the recent pin action in TLT and GLD which were pointing to higher rates/stronger economy.  Those moves appear to be reversing. 

            On the other hand, yesterday the Fed reaffirmed that the liquidity spigot remains on full blast.  And as you know, I believe that as long as it is, stock prices will continue to advance with the caveat that at some point investors may wake up to the reality of this irresponsible policy.
  
            This is for the bulls.  Although I would challenge the premise that Markets always discount all that is knowable at any one moment.  The operative word is ‘always’.  I contend that what the Market knew in October 2008 wasn’t that much different than what it ‘knew’ six months later in March of 2009.  In October 2008, investors ‘knew’ that the mortgage back securities market had many problems that could lead to a seize up in the financial system.  They ‘knew’ it because multiple analysts pointed it out.  But they chose to ignore it because they were greedy.  In March 2009, they ‘knew’ it because it happened.  But they chose to ignore the magnitude of the problem because they were fearful.  In short, what the Market ‘knows’ and how it deals with it are two different matters.  That is why having a Valuation Model and a Buy/Sell Discipline is a better strategy than buy and hold.

            2019 dividend cuts to date.

    News on Stocks in Our Portfolios
 
NIKE (NYSE:NKE) declares $0.245/share quarterly dividend, 11.4% increase from prior dividend of $0.22.

Economics

   This Week’s Data

      US

            October retail sales were up 0.3% versus expectations of up 0.2%; however, ex autos, they were up 0.2% versus +0.4%.

            The Ny Fed manufacturing index came in at 2.9 versus forecasts of 5.0.

     International

            September Japanese industrial production rose 1.7% versus estimates of +1.4%; capacity utilization was +1.0% versus -0.6%.

            The September EU trade surplus was E18.7 billion versus consensus of E17.5 billion; its October CPI was +0.1% versus +0.2%.

    Other

            Not surprisingly, Hong Kong’s Q3 GDP contracted 3.2%.

            Mortgage delinquencies fall to 25 year low.

What I am reading today

            The making of Americans.
           

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Thursday, November 14, 2019

The Morning Calls--The Fed is calling the tune


The Morning Call

11/14/19

The Market
         
    Technical

The Averages (27783, 3095) moved higher yesterday.  Volume was up and breadth was stronger---pushing it further into overbought territory. The VIX was up 2 ½ %---but continues to support the breadth overbought reading. 

My assumption remains that momentum is to the upside; but there are still some short term negatives:  (1) October 11th gap up opens need to be closed and (2) the VIX and breadth suggest equities are overbought.

The bond market was up another 5/8%, continuing its bounce off the lower boundary of its very short term uptrend.  It is too soon to assume that worst is over, but clearly a strong bounce off of a definable support level is a good sign.

The dollar was down a penny and remains strong.

Gold advanced another 3/8 %, but momentum remains to the downside with little support visible before it hits its 200 DMA (six points lower). 

            Wednesday in the charts.

    Fundamental

       Headlines

Yesterday’s dataflow was mixed.  Weekly mortgage and purchase applications were strong, October CPI ran a little hotter than expected (but that should make the Fed happy) while core CPI was in line and the October budget deficit came in above expectations.

Overseas, the stats were again upbeat. October Japanese and UK PPI and CPI were below estimates while October German CPI was in line. September EU industrial production was well above forecasts.

            In other news:
           
            Powell gave his presentation to the Congressional Joint Economic Committee.  In it, he repeated the narrative from the last FOMC meeting---no more rate cuts in sight, but no increases either even if the economy starts running hot and most importantly, NotQE is a live and well.  If you want to read his full prepared statement, here it is:

            Fed losing control of rates again; but this time to the downside.

            Sub zero interest rates pose a problem for the insurance industry.

            Also, as I noted in yesterday’s Morning Call, Trump started the day off with a bang, threatening more tariffs.

            Which was followed by reports that the Chinese are resisting the size of proposed ag purchases as well as provisions against technology transfers and enforcement.

            And then this bit of news.  German businesses are moving out of China because of problems with its industrial policies.  Would they be doing this without the US having led the way?  Who knows.  Will it put increasing pressure on China to mend its ways?  Who knows,  But it will impede the progress of China’s economic development.  (see economic data below)

            Bottom line: if you had any doubts about whose was calling the tune in the Market, it was likely eliminated yesterday, as the trade rhetoric heated up but Powell promised more NotQE.

            But that just means that valuations are getting more outrageous.  Caveat emptor.

            The bull market in bearish predictions.


    News on Stocks in Our Portfolios
 
ADP (ADP +1.3%) announced the buyback after the bell yesterday.
The program fully replaces the 2015 authorization to repurchase up to 25M shares of common stock, which had 433M shares outstanding.
Economics

   This Week’s Data

      US

            The October budget deficit came in at $134 billion versus forecasts of $133 billion.

                October PPI rose 0.4% versus expectations of +0.3%; core PPI was +0.3% versus +0.2%.

            Weekly jobless claims rose 14,000 versus consensus of +4,000.

     International

            Preliminary Q3 Japanese GDP growth was reported at +0.1% versus estimates of +0.2%.

            The second estimate of Q3 EU GDP growth was +0.2%, in line; employment change was +0.1% versus +0.2%.

            The flash Q3 German GDP growth rate was +0.1% versus projections of -0.1%.

            October Chinese fixed asset investments rose 5.2% versus consensus of +5.4%; industrial production was +4.7% versus +5.4% retail sales were +7.2% versus +7.9%.

            October UK retail sales fell 0.3% versus expectations of +0.2%.

    Other

            Update on household debt and credit.

            The most fiscally conservative party—notable by their absence is any mention of Kennedy/Johnson administrations.

What I am reading today

            Death and taxes.

            WWII US sub found 75 years after being sunk.

            Navy UFO sighting.

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Wednesday, November 13, 2019

The Morning Call--Trump disappoints. Will Powell?


The Morning Call

11/13/19

The Market
         
    Technical

The Averages (27691, 3091) turned in a second day of mixed performance (Dow unchanged, S&P up).  Volume was up slightly (but still quite low); but breadth was flat but remains in overbought territory. The VIX was down a penny---continuing to support the breadth overbought reading. 

My assumption remains that momentum is to the upside; but there are still some short term negatives:  (1) October 11th gap up opens need to be closed and (2) the VIX and breadth suggest equities are overbought.

The bond market was up ½%, bouncing off the lower boundary of its very short term uptrend---its first challenge post 100 DMA reversion to resistance.  If that boundary can hold, then the worst may be over for TLT.

The dollar rose 1/8% and remains strong.

Gold advanced ¼ %, but momentum remains to the downside with little support visible before it hits its 200 DMA (six points lower).  Given the pin action in TLT and UUP, gold’s rise may just be a reflexive bounce off a somewhat oversold condition.

            Tuesday in the charts.

    Fundamental

       Headlines

Yesterday’s numbers were disappointing.  Month to date retail chain store sales growth slowed and the October small business optimism index was below estimates.

Overseas, the data was turned positive.  October Japanese machine tool orders and September UK personal income were less than anticipated while weekly UK unemployment rose, September unemployment, preliminary Q3 productivity, November EU and German economic sentiment were above expectations.

            The main headline of the day was Trump’s speech to the Economics Club of New York in which he patted himself on the back (as always), beat the Fed about the head and shoulders (again) but was noncommittal on a US/China trade deal. 

            ***overnight, Trump cranked up rhetoric, threatening China will higher tariffs if there is no Phase One deal.

            China’s unofficial response.

            I think that this analyst makes an interesting point:  since industrial policy and IP theft are the motivating factors behind the US/China trade dispute, it seems reasonable to focus on combating those specific policies, per the below example, versus a broader trade/tariff war.  So, a Phase One that is accompanied by ‘national defense’ measures to combat unfair Chinese trade practices could work.
           
            And as November 2020 looms, middle class tax cuts are back on the table.

            Bottom line: the data isn’t supporting the current Market narrative that the economy is about to improve its rate of growth.  Trump’s speech (1) was somewhat disappointing to those wanting a trade deal, though the consensus remains that one is coming and (2) advocated the Fed embrace negative interest rates which, if implemented, would only make the misallocation and mispricing of assets worse.  Meanwhile, his chief economic advisor indicated that additional tax cuts are being considered at a time when the economy is at full employment and the budget deficit and national debt grow ever larger. 

            I don’t think that I could come up with a worse set of headlines, barring Iran nuking Israel.  Yet the investors appear unconcerned.  Thank you NotQE. (we will get a update on that from a Powell speech today)

            I will continue to focus on those stocks that have traded into the Sell Half Range and act accordingly.  

    News on Stocks in Our Portfolios
 
Automatic Data Processing (NASDAQ:ADP) declares $0.91/share quarterly dividend, 15.2% increase from prior dividend of $0.79.

Economics

   This Week’s Data

      US

            Month to date retail chain store sales growth slowed from the prior week.

            Weekly mortgage applications rose 9.6% and purchase applications were up 5.1%.

            October CPI came in at +0.4% versus estimates of +0.3%; core CPI was +0.2%, in line

     International

            October Japanese PPI increased 1.1% versus expectations of +1.2%.

            October German CPI was +0.1%. in line.
           
            October UK PPI was -0.1% versus estimates of +0.1%; CPI was -0.2% versus -0.1%; core CPI was +0.1% versus flat.

            September EU industrial production advanced 0.1% versus consensus of -0.3%.

    Other

            Update on auto loans.

            The leading index for commercial real estate was up in October.

            The rising Chinese demand for pork.

            The latest on Brexit.

What I am reading today
              
             The Warren Medicare for All plan has been released.  Here is an initial take on the math.

            Reducing stress.  Now I know why I love the beach so much.

            Scientists detect huge thermonuclear blast in space.

            Lessons from a master.

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Tuesday, November 12, 2019

The Morning Call---Overbought


The Morning Call

11/12/19

The Market
         
    Technical

The Averages (27691, 3087) turned in a mixed performance (Dow up, S&P down) on a semi-holiday day.  Volume was lower (not surprising); but breadth was quite strong (surprising on a mixed low volume day), pushing it still further into overbought territory. The VIX was up 5 1/8%---but still supports the breadth overbought reading. 

My assumption remains that momentum is to the upside; but there are still some short term negatives:  (1) October 11th gap up opens need to be closed and (2) the VIX and breadth suggest equities are overbought.

The bond market was closed.  The dollar was off 1/8%, but its chart remains strong.

Gold was down another ¼ %, ending below its 100 DMA for a third day, reverting to resistance.  However, it is still well above its 200 DMA and the lower boundary of its short term uptrend; meaning it has plenty more room on the downside before meeting any significant support.

            Another deep dive into the problems in the repo market.

Monday in the charts.

    Fundamental

       Headlines

            No US stats reported yesterday.

            Overseas, there was plenty. October Chinese CPI was hotter than estimates while  PPI was cooler; auto sales declined as did loan growth.

            September Japanese machinery orders fell more than expected.

September UK trade deficit was larger than forecast while industrial production, construction output and GDP were less.  October German PPI declined.

As you might expect, all was quiet on the Western front on a semi-holiday.  The news flow will pick up today with a speech by the Donald.  Then on Thursday, the Fed releases an update to its bill purchase program (NotQE). Finally, a giant data dump on Friday that will include October retail sales and industrial production.
                     
            And another consumer confidence measure will also be released.

                Bottom line: I think that the technical condition of the Market (overbought) is the story for the very short term.  However, assuming the Fed reaffirms its commitment to NotQE on Thursday, any pullback will should be limited. 

           That doesn’t mean that large sectors of the stock market aren’t dramatically overvalued.

            An argument against stocks being overvalued.

            And why they may stay that way.

            But the big boys disagree.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            The October small business optimism index came in at 102.4 versus projections of 103.5.

     International

            October Japanese machine tool orders fell 37.4% versus forecasts of -30.0%

            Weekly UK unemployment rose by 8,000 jobs versus estimates of up 38,000; September unemployment was 3.8% versus 3.9%; average (consumer) earnings were up 3.5% versus +3.8%; preliminary Q3 productivity was +0.3% versus -0.2%.

            November EU economic sentiment was -1 versus expectations of -32.5.

            November German economic sentiment was -2.1 versus consensus of -13.

    Other

            US heavy truck sales up in October.

            LA port traffic down in October.

            What economists don’t know about the economy.

What I am reading today

            Retirement math.
           

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